PSS: Keeping the Faith vs. Throwing in The Flag

OK. So do you go all-in, or throw in the towel? That’s the question that most holders of PSS will be thinking today. Though it’s not in our portfolio, this is definitely a name I’ve liked, and have been warming towards recently, so I am definitely in the same camp. Here’s a few notables…
Reasons to consider throwing in the towel
1) PSS missed both the Street’s and my estimate (-$0.44, and -$0.36, respectively) by a mile. Losing $0.54 with such negative momentum is not exactly indicative of being one of the ‘winners’ in this climate.

2) It’s been over a year since the Stride Rite acquisition, and over 2-years since this management team hit stride in its strategy to regain control of the consumer and grow the business. At some point sooner than later, we need to draw a line in the sand and expect results.

3) ‘Consumer connection’ has never been higher per Payless’ internal scoring system, but what good is that if we’re not seeing it in numbers?

4) Costs out of China are higher than the company guided, though this is not a big surprise to us.

5) Due to promotional environment & inventory levels at competitors, higher cost shoes were discounted so heavily that they impacted sales at PSS’s “primary” brands.

Reasons to keep the faith
1) Price point is up, transactions are up, product mix is improving, customer scores are reportedly getting better. Weak traffic is the problem. If there was ever an environment to give a zero-square-footage-growth retailer the free pass on traffic, then this is probably it.

2) Very interesting to hear Rubell say that he’s never seen inventory more healthy. Inventory in dollars ended the quarter up mid single digits, but in units it was down single digits. Setting the stage for better gross margins in 2Q onward?

3) SG&A cost reductions better than expected ~$30mm of identified reductions in 2009 with more possible. We’re modeling SG&A down 3-4% in absolute dollars in 2009.

4) Sperry and Saucony continued double digit growth rates with category growth for Sperry and channel expansion for Saucony (Europe) promising.

5) Significant CapEx reduction (from $130 to $85) will boost FCF. Even with operating cash flow down by a third, FCF growth should still be positive for the year.

6) THIS COMPANY IS NOT GOING BANKRUPT, AND WE DON’T EVEN THINK THEY’LL COME REMOTELY CLOSE TO BREACHING A COVENANT.

7) How I’m doing the math, the cash flow here should get total net debt down by 80% over the next three years. What does that mean? It means that today the EV/EBITDA multiple of 3.8x is nothing to write home about on the long side. But with debt coming down, we’re at 1.5-2.0x EBITDA 2-3 years out. At that point, we’re also looking at about 4x EPS. I’ll take that.

8) Timing considerations… In 2H, we see costs from China come down, duplicative DC costs come off, SG&A cuts, lower interest expense and tax rate, all at the same time we cycle very easy top line compares. When I put this in context of my view that cash flow for the group overall will begin to turn in 2Q/3Q (see my 3/5 note I’m Getting Fundamentally Bullish), and it starts to paint a nice multiple-expanding picture for PSS.

I’m definitely not throwing in the towel here. In fact, expect me to synch more with Keith on this one as it relates to his timing and sizing models for a potentially powerful long-term call.

Casey Flavin
Brian McGough

SECTOR SPOTLIGHT | Live Q&A with Healthcare Analyst Tom Tobin Today at 2:30PM ET

Join us for this edition of Sector Spotlight with Healthcare analyst Tom Tobin and Healthcare Policy analyst Emily Evans.

read more

Ouchy!! Wall Street Consensus Hit By Epic Short Squeeze

In the latest example of what not to do with your portfolio, we have Wall Street consensus positioning...

read more

Cartoon of the Day: Bulls Leading the People

Investors rejoiced as centrist Emmanuel Macron edged out far-right Marine Le Pen in France's election day voting. European equities were up as much as 4.7% on the news.

read more

McCullough: ‘This Crazy Stat Drives Stock Market Bears Nuts’

If you’re short the stock market today, and your boss asks why is the Nasdaq at an all-time high, here’s the only honest answer: So far, Nasdaq company earnings are up 46% year-over-year.

read more

Who's Right? The Stock Market or the Bond Market?

"As I see it, bonds look like they have further to fall, while stocks look tenuous at these levels," writes Peter Atwater, founder of Financial Insyghts.

read more

Poll of the Day: If You Could Have Lunch with One Fed Chair...

What do you think? Cast your vote. Let us know.

read more

Are Millennials Actually Lazy, Narcissists? An Interview with Neil Howe (Part 2)

An interview with Neil Howe on why Boomers and Xers get it all wrong.

read more

6 Charts: The French Election, Nasdaq All-Time Highs & An Earnings Scorecard

We've been telling investors for some time that global growth is picking up, get long stocks.

read more

Another French Revolution?

"Don't be complacent," writes Hedgeye Managing Director Neil Howe. "Tectonic shifts are underway in France. Is there the prospect of the new Sixth Republic? C'est vraiment possible."

read more

Cartoon of the Day: The Trend is Your Friend

"All of the key trending macro data suggests the U.S. economy is accelerating," Hedgeye CEO Keith McCullough says.

read more

A Sneak Peek At Hedgeye's 2017 GDP Estimates

Here's an inside look at our GDP estimates versus Wall Street consensus.

read more

Cartoon of the Day: Green Thumb

So far, 64 of 498 companies in the S&P 500 have reported aggregate sales and earnings growth of 6.1% and 16.8% respectively.

read more